6 replies to this topic

[James Quillian]

I still haven’t flipped to the short side of the market. I am long fewer stocks but with larger positions and short more stocks but with smaller positions. I haven’t added a single short since Bernanke announced the government’s affirmative action program. Here is why the market is going up without interruption. 1.) The government has a seemingly unlimited amount of money to use in supporting stock prices. 2.) Very little government money need be used to support stock prices because volume is so thin. Because almost no one besides me holds long term short positions, any amount of buying will cause a short squeeze. 3.) Hedge funds are paid for paper profits. Once any kind of asset starts rising, there is an incentive to collectively keep the asset rising. This causes a tendency for price advances to stretch out much longer than they would otherwise. If a hedge fund increases in value for say 5 years in a row and then suddenly loses all of its value in the sixth year, clients lose everything and the gigs up for the hedge fund but they come out pretty good. 4.) Ben Bernanke is right about the wealth effect creating consumer demand, so high stock prices start appearing to be justified. A higher stock market literally creates the prosperity that is needed to fuel corporate profits and equities rise even higher. This is a house of cards but it works for a while. Eventually something outrageous happens like did back in 2008 and it all falls apart. In the meantime traders are confounded. The feeling is kind of like sawing through the branch of a tree and then it doesn’t fall to the ground. Instead the branch stays suspended in mid air, defying the laws of gravity. I cannot think of a way in the world to even guess how long this can last. Short sellers are going to keep getting squeezed and re-sqeezed just as they did for almost 3 years straight beginning in 2006. There always is an outside chance that the mentality of short sellers will shift toward holding positions longer. Then things could start changing quickly.

[Douglas]

James, an excellent place to watch for capitulation in long term shorts is www.collective2.com. One poor trading system I've been watching there which has remained short up the entire recent bull run finally threw in the towel last week and went flat. I believe we're a whisker's breadth from a certain Elliott Wave guru also giving up the dark side. Soon everyone will be drinking the Koolaid and BTFD. Hail to Bubble Ben and the power of the printing press. Heaven help us if he runs out of ink.

Edited by Douglas, 19 February 2011 - 05:23 AM.

[BWTrader]

About half my trades are longs and about half are shorts. This being "diversified" is a key to staying "in the game." BW

[Data]

I would add... 5) Currency intervention by foreign central banks to support the ECB debt purchases. Remember the Euro fell by 10 percent in November and the stock market fell in spite of QE2.

[viccarter]

I still haven’t flipped to the short side of the market. I am long fewer stocks but with larger positions and short more stocks but with smaller positions. I haven’t added a single short since Bernanke announced the government’s affirmative action program.
Here is why the market is going up without interruption.
1.) The government has a seemingly unlimited amount of money to use in supporting stock prices.
2.) Very little government money need be used to support stock prices because volume is so thin. Because almost no one besides me holds long term short positions, any amount of buying will cause a short squeeze.
3.) Hedge funds are paid for paper profits. Once any kind of asset starts rising, there is an incentive to collectively keep the asset rising. This causes a tendency for price advances to stretch out much longer than they would otherwise. If a hedge fund increases in value for say 5 years in a row and then suddenly loses all of its value in the sixth year, clients lose everything and the gigs up for the hedge fund but they come out pretty good.
4.) Ben Bernanke is right about the wealth effect creating consumer demand, so high stock prices start appearing to be justified. A higher stock market literally creates the prosperity that is needed to fuel corporate profits and equities rise even higher. This is a house of cards but it works for a while.
Eventually something outrageous happens like did back in 2008 and it all falls apart. In the meantime traders are confounded. The feeling is kind of like sawing through the branch of a tree and then it doesn’t fall to the ground. Instead the branch stays suspended in mid air, defying the laws of gravity.
I cannot think of a way in the world to even guess how long this can last. Short sellers are going to keep getting squeezed and re-sqeezed just as they did for almost 3 years straight beginning in 2006. There always is an outside chance that the mentality of short sellers will shift toward holding positions longer. Then things could start changing quickly.

great insight with this post.

Edited by viccarter, 19 February 2011 - 12:42 PM.

[entre]

It's really simple. The Federal Reserve is an unemotional buyer of stocks at regular intervals, so the market reflects that. Seeing how there are no other trillion dollar hedge funds out there, the Fed is by far the largest buyer of financial securities. So it makes sense that the consistent low-volatility rally has been reflective of the investment pattern of it's principal buyer.

http://www.newyorkfe...n_schedule.html

The Fed buys stocks through these subsidiaries of theirs, the primary dealers. Several of these names you'll notice as marketmakers for individual stocks on your level 2 trading platforms. The myth is that the Fed injects money into the economy directly. The reality is these guys below who make markets get the Fed money. Whatever amounts trickle down from these guys into the real economy happen long after these guys have bought stocks with Fed money.

BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
MF Global Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.

http://www.newyorkfe...rs_current.html

FWIW, my prediction is the stock market will top out around 2 months before quantitative easing ends, or the Fed switching to a neutral bias, whichever happens first. The reason for 2 months is because the market topped out 1 month before the last quantitative easing period ended in June of last year(May flash crash), and the Fed injections don't get the same bang for the buck in spx points like they used to. The Fed can control the stock market until the much larger dollar currency market starts to discount the end of quantitative easing(the May flash crash was preceded by a dollar rally).

[James Quillian]

entre, I couldn’t agree more. The Fed is under enormous political pressure to goose assets. That path of least resistance is to see goosing assets as good for everyone. It makes sense that since the dealers all compete for the Fed’s business; the one that gets the business is the one that is most likely to do what the Fed wants done with the money which is to support the stock market.
This has actually been going on since March of 2003. In the spring of 2006 H. Paulson was brought on as Treasury Secretary for the express purpose of coordinating the efforts when the market was getting vulnerable to an extended correction. The bailout of 2008 was as very much a face saving mechanism.

It's really simple. The Federal Reserve is an unemotional buyer of stocks at regular intervals, so the market reflects that. Seeing how there are no other trillion dollar hedge funds out there, the Fed is by far the largest buyer of financial securities. So it makes sense that the consistent low-volatility rally has been reflective of the investment pattern of it's principal buyer.

http://www.newyorkfe...n_schedule.html

The Fed buys stocks through these subsidiaries of theirs, the primary dealers. Several of these names you'll notice as marketmakers for individual stocks on your level 2 trading platforms. The myth is that the Fed injects money into the economy directly. The reality is these guys below who make markets get the Fed money. Whatever amounts trickle down from these guys into the real economy happen long after these guys have bought stocks with Fed money.

BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
MF Global Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.

http://www.newyorkfe...rs_current.html

FWIW, my prediction is the stock market will top out around 2 months before quantitative easing ends, or the Fed switching to a neutral bias, whichever happens first. The reason for 2 months is because the market topped out 1 month before the last quantitative easing period ended in June of last year(May flash crash), and the Fed injections don't get the same bang for the buck in spx points like they used to. The Fed can control the stock market until the much larger dollar currency market starts to discount the end of quantitative easing(the May flash crash was preceded by a dollar rally).